Technology entrepreneurs are hopeful the Abbott government will end the ­up-front taxation of employee share options, a policy they say is one of the biggest barriers to Australian tech ­start-ups.

The federal government on Tuesday rebooted a stalled inquiry into whether to repeal 2009 rules that saw employees taxed when they receive shares options from their company, rather than when they are sold or become full shares.

The Labor tax changes were aimed at cracking down on executives who try to reduce tax by channelling income into share options. But the changes were seen as detrimental to technology start-ups in Australia, which use the options to attract talent instead of paying high salaries in their early years.

The co-founder of successful start-up Atlassian,
Mike Cannon-Brookes
, said up-front taxation of options was the biggest barrier for companies like his. “Everything else is secondary," he said.

He said the government should adopt a US-like system where the tax applies when the employee realises a gain – such as when they exercise their right to sell the shares. “It allows for control between capital gains tax and income-based taxation to be up to the employee," he said.

This would create “business value" and make it easier to attract talent. “It’s a key part of the motivation for talented folk to take a risk in working for a start-up," he said. “The current rules definitely prevent talent making that jump today."

The co-founder of start-up networking group Enterprise Network for Young Australians,
Jeremy Liddle
, said the government “should be moving to legislate immediately, not conducting further consultation".

“Current policy makes it complicated and expensive to set up employee share schemes, which makes it much harder to attract and retain top-quality staff," he said.

Related Quotes

Company Profile

The tax rules have led to a number of technology companies offering their employees shares under “synthetic" regimes by loaning or restricting shares given to staff, or taking on employees’ tax burdens, which can range into the tens of thousands of dollars.

“We’ve had to look at multiple avenues to try and issue equity to our employees without having them pay a massive tax bill this financial year, when essentially the shares aren’t tradeable," said
Dan Friedman
, chief executive of Ninja Blocks, which makes home automation equipment.

Mr Friedman said he planned to offer shares that would vest after four years to his eight employees.

“It’s been an ongoing thing for two years now because we haven’t been able to set it up. We’re actually pulling the trigger now but it’s been one of those things where we’ve constantly been looking around trying to find a non-arduous way of putting it together that doesn’t cost us a bomb," he said.

Technology lawyer Nick Abrahams said synthetic schemes involved thousands in fees to lawyers and accountants, a cost that could end if the government changed the tax rules.

“I spend a lot of time working with US investors coming into Australia and I spend a lot of time apologising for our options-taxing regime because they can’t believe it," he said. “I don’t believe the amount of tax they’re getting out of taxing options on start-ups is material."

Communications Minister
Malcolm Turnbull
previously said he had talked to Australian start-ups who had chosen to move to the US, where employee share schemes are seen as vital to the ecosystem. The Institute of Public Accountants said the existing policy was “akin to being given a lottery ticket then being asked to pay tax on winnings you haven’t actually received". on how the tax scheme has hit start-up companies and what steps are needed to change the current system

“It’s part of the reason why innovative companies move offshore to develop technology rather than stay in Australia. The law needs to be changed to allow a deferment of the tax to when the shares are realised, as other countries allow."

The founder of online wine sales site Vinomofo, Andre Eikmeier, said the government needed to make immediate changes. “It’s a market-driven [approach], and that’s always the right approach for product-creation, as long as there’s follow-through," he said.

“The feedback we’ve been getting is that this is a massive handbrake on start-ups in Australia," Mr Hockey said. “And insofar as we don’t know, as Tony [Abbott] said, what we will inherit, this is an obvious area for change."